Will Increasing Housing Supply Reduce Urban Inequality?

Abstract

In recent years, there has been a debate over the extent to which housing-supply regulations increase inequality and reduce workers access to more productive cities. This problem is formalized in a two-city model with skilled and unskilled workers to study the impact of one city relaxing land-use restrictions. Such a policy will raise welfare, but inequality and the number of unskilled workers locating in more productive cities may rise or fall. And when the policy does reduce inequality, there is a decline in unskilled workers in the higher productivity city. Inclusive zoning policies can mitigate this effect but weaken agglomeration economies. A city authority that takes into account equity considerations may prioritize more or less housing for unskilled workers than the market, depending on the degree of societal aversion to inequality. The model is extended to include homeownership and racial discrimination in the housing market. Homeowners are not necessarily harmed by less restrictive land-use policy, but racial discrimination reduces the benefits of homeownership for minority groups.